Cash usage in rapid decline says latest Payments Council report

Written by Neil Ainger

19/4/2010

Cash will make up less than half of all transactions in just five years' time, predicts the Payments Council in its The Way We Pay 2010 report, which details how "cards [particularly debit cards] took control of our wallets over the last decade, with cheques and cash being increasingly replaced". Only 40 per cent of spending in pubs last year, for instance, was in notes and coins, down from 90 per cent in 1999, and this is predicted to fall to just 25 per cent in 2018.

The Payments Council report also envisages cheque usage falling away until it represents just 0.8 per cent of retail transactions by 2018, although the organisation, which sets the strategy for the UK payments sector, has also set this date for the ending of all cheques, so has a vested interest. Many high value SME transactions still rely on this old fashioned form of payment. Consumer groups and small businesses are still fighting for its retention, and the House of Commons Treasury Committee held an inquiry in March questioning the decision to wind down the system by 2018, so it seems a fight might on the cards to retire this expensive system for banks.

According to the report, almost 80 per cent of all cash transactions are now for less than £10, the initial limit for most contactless card payments (although this has just been raised to £15). If this technology takes off as hoped, and one in seven UK citizens now have the capability on their cards, it could further weaken the hold of cash on the economy in years ahead. The Way We Pay 2010 research predicts cash will account for less than half of all transactions within five years, and just 45 per cent by 2018. "Although cash won't disappear in our lifetime, the continuing payments revolution will make it an ever smaller part of our spending," says Mike Bowman, head of policy and markets at the Payments Council. "Even the traditional sight of people waving tenners at the bar is fast vanishing; they're more likely to brandish debit cards now."

Contactless could accelerate the decline of cash in future years. As Bowman states, "there's a huge opportunity to replace billions of low-value cash transactions with a quick swipe." But notes and coins have been around since Roman times, so cash isn't going to be killed off entirely and some consumers will always champion it. Instrumental in the decline so far though is the use of debit cards, which accounted for £264 billion worth of spending last year, versus just £65 billion in 1995. This is predicted to almost double to £490 billion by 2018. Additionally, cash wages were given to 12.5 per cent of workers in 1995 and only 5 per cent last year. The figure will be one in fifty by 2018. The switch to paying state benefits direct into bank accounts, instead of via cash at the post office has also been key. Conversely, getting your hands on cash has become easier with 63,000 ATMs in the UK now, two-and-a-half times more than ten years ago.

"More and more people have opened bank accounts in the last ten years [to accommodate electronic wage payments], and fewer now have jobs in manufacturing where a weekly wage packet is more common," confirms Bowman. "Interestingly, the million-strong migration of Eastern Europeans to the UK in the mid 2000s may have temporarily slowed cash's decline as they were initially paid in notes, but as these migrants returned home or settled permanently, and opened bank accounts, cash usage has fallen back again."

Credit card usage has surprisingly fallen in real terms, reflecting the fact that debit card technology has "become the payments workhorse". By 2018, one of four of all payments will be via this channel, predicts the Payments Council. Cards generally have seen a fourfold rise in use over the last decade, with plastic deployed six billion so far this year.

One note of caution is sounded by Pat Carroll, CEO of security vendor ValidSoft, who says that "with this shift from notes to plastic early detection of fraudulent card-based transaction will become increasingly important". True enough, but if the investment goes in, then this is achievable. The arrival of Faster Payments in the UK is vital too, both decreasing the amount of time security checks can be carried out in and further encouraging electronic non-cash or cheque payment methods. At launch, it was calculated that about eight per cent of Bacs phone and online banking payments and standing orders were eligible to become Faster Payments, but in fact, many more transactions have materialised suggesting that customers have decided to replace a cheque or cash payment in favour of something faster. Half of regular standing orders have now migrated to Faster Payments, while individuals are making around ten million more one-off internet and phone payments per month than before the new system was launched.

The Payments Council's Bowman says that despite its gradual [very slow] rollout, "the speed and convenience of Faster Payments has generated more transactions than were previously processed by Bacs, much in the same way as a new motorway promising rapid transport always generates more traffic than it was intended to alleviate."